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Thursday, 22 September 2016

Asian shares soar, dollar falters on slow-motion Fed

Asian shares rallied on Thursday, taking their cue from Wall Street, after the Federal Reserve left U.S. interest rates unchanged and slowed the pace of future hikes, knocking the dollar and lifting commodity prices.

European markets are likely to follow suit, with financial spreadbetters predicting Britain’s FTSE 100 .FTSE will open up as much as 0.6 percent, and Germany’s DAX .GDAXI and France’s CAC 40 .FCHI will start the day about 0.8 percent higher.

MSCI's broadest index of Asia-Pacific shares outside Japan extended gains to 1.2 percent in its sixth straight session of increases, just 0.9 percent shy of its one-year high touched earlier this month.

Asia's strong gains follow surges of 1.1 percent for the S&P 500 .SPX, 0.9 percent for the Dow Jones industrial average .DJI and 1.3 percent for the Nasdaq Composite . which closed at a record high.

"The market got what it expected/wanted," said Daniel Morris, senior investment strategist at BNP Paribas Investment Partners in London. "Another dose of central bank support for markets following the Bank of Japan meeting."

While Tokyo is on holiday on Thursday, stocks .N225 closed up 1.9 percent on Wednesday after the BOJ's shift to targeting a positive yield curve, a move that was considered bullish for banks, insurers and pension funds.

But "Japan equities may lag as the bank relief rally runs its course and the yen is strengthening," BNP Paribas's Morris said. "Japan needed a Fed hike in order to push the yen down."

The Fed did signal it could hike rates by year-end as the labour market improved further, but cut the number of rate increases expected in 2017 and 2018. It also reduced its longer-run interest rate forecast to 2.9 percent from 3 percent.

That left investors feeling any tightening would be glacial at best. Market pricing for a December move rose only a fraction to 59.3 percent <0#FF:>, from 59.2 percent, according to CME Group's FedWatch tool.

Richard Franulovich, an analyst at Westpac, noted that back in June the median dot plot showed five hikes to end-2017. Now it is down to just three.

"We do not feel that the dollar has the wherewithal to make a more concerted run higher in the next few weeks," he added. "The FOMC is unlikely to deliver anything more than a very 'dovish' December hike."

The dollar rose as high as 102.755 yen after the BOJ's announcement on Thursday, but the yen took back its lost ground after the BOJ's announcement left some unimpressed and following the Fed's less-hawkish statement.

"Fundamentally, (the BOJ decision) did not amount to an easing of monetary policy, but merely offers policy tweaks at the margin and a strengthening of forward guidance," said Frederic Neumann, co-head of economic research at HSBC in Hong Kong.

"The BOJ now essentially promises to purchase JGBs for even longer, until inflation exceeds, and not merely meets, its 2 percent inflation target."

The dollar index .DXY, which tracks the greenback against a basket of six major peers, slipped 0.3 percent to $95.386. It touched a six-week high of 96.333 on Wednesday, before ending the day down 0.4 percent from its previous close.

Another central bank struggling with too-low inflation is the Reserve Bank of New Zealand, which held rates steady on Thursday but renewed a pledge to cut again even as much of the domestic economy grows briskly.

The RBNZ's blunt statement that further easing would be needed knocked the local dollar down 0.2 percent to $0.7334 NZD=, but the market has found it hard to sell a currency that still offers an overnight interest rate of 2 percent.

The Australian dollar AUD= edged up 0.25 percent to an almost two-week high of $0.7641 after Reserve Bank of Australia Governor Philip Lowe said interest rate cuts and a weaker currency are helping the economy, and that it was "not particularly useful" to keep cutting rates in the hope that it will eventually lift growth.

In commodity markets, gold traded down 0.3 percent at $1,332.63 an ounce XAU=, having climbed 1.7 percent as the U.S. dollar declined on Wednesday.

Oil prices added as much as 3 percent on Wednesday after a third surprise weekly drop in U.S. crude stockpiles boosted the demand outlook in the world's largest oil consumer.

Another supportive factor was an oil workers' strike in Norway, which threatened to cut North Sea crude output.